OREANDA-NEWS. Fitch Ratings has affirmed Togo-based Ecobank Transnational Incorporated's (ETI) Long-Term Issuer Default Rating (IDR) at 'B'. The Outlook is Stable. ETI is the holding company of the pan-African Ecobank group. A full list of rating actions is at the end of this commentary.

KEY RATING DRIVERS

IDRS AND VIABILITY RATING

ETI's Long-term IDR is driven by the group's intrinsic creditworthiness, as reflected in the 'b' Viability Rating (VR). The VR is constrained by a volatile operating environment. It also factors in ETI's, vulnerable asset quality, pressure on performance from expected high loan impairment charges, and limited capital buffers compared with international standards and pressure on USD liquidity at subsidiary Ecobank Nigeria.

Positively, the VR reflects diversification benefit from the group's operations across multiple countries and a leading pan-African network.

ETI's challenging operating environment has a high influence on the bank's VR. As a leading pan-African banking group, ETI operates in unrated or B-category rated countries. Fitch also views financial market developments and regulatory frameworks as weak in most of these jurisdictions. About 35% of ETI's assets are in Nigeria (B+/Stable) through the 100%-owned Ecobank Nigeria. The operating environment in Nigeria is under considerable pressure from the fall in oil prices and their wider impact on the economy. The recent move to a more flexible foreign-exchange regime has resulted in further currency depreciation and has not increased the supply of foreign currency significantly.

ETI's company profile is solid but is constrained by the environment the group operates in. It has fully fledged banking subsidiaries in 34 countries across the region and provides a full range of corporate, retail and investment banking services. ETI benefits from substantial synergies with its strategic shareholders Nedbank (BBB-/Stable) and Qatar National Bank (QNB, AA-/ Stable). Synergies come from cross-border banking as well as the sharing of technical skills, strong governance practices and risk management expertise. We also believe that ETI has addressed its widely publicised corporate governance problems.

Fitch views ETI's asset quality as vulnerable given its significant exposure to volatile emerging industries and low-rated sovereigns. ETI's impaired loans ratio significantly deteriorated at end-1H16 to 8.6%, from 4.4% at end-2014, on the back of a portfolio review in 3Q15 and further deterioration of the loan portfolio in Nigeria and west Africa.

Asset quality metrics will remain under pressure into 2017 given the challenging environment in Nigeria and ETI's significant oil & gas exposures (22% of total loans at end-1H16). However, expected write-offs (notably in Nigeria) and some further restructuring in the oil sector should ease pressure on ETI's impaired loans ratio. Fitch views ETI's impaired loan loss reserve coverage as weak (63% as of end-1H16), given uncertainties relating to collateral valuation and potential issues in realising collateral.

ETI's capacity to generate earnings is solid but under pressure. The group, despite being diversified by region, is highly reliant on Nigeria (about a third of 1H16 operating income) and is therefore sensitive to developments in the domestic operating environment. Therefore, we expect operating profitability to be affected in 2016 by still high loan impairment charges (2.7% of gross loans in 1H16), further currency depreciation and lower loan growth.

ETI's capital buffers are limited, considering the group's exposure to volatile sub-Saharan African countries, which are sources of high credit and operational risk, and growing net impaired loans exposures to equity (16% of equity at end-1H16). However, ETI's diversified shareholders base is a strength for the group compared with peers. ETI's double leverage ratio (109% at end-1H16) is moderate and we expect this to remain stable given the focus on consolidating the group's position in sub-Saharan Africa.

ETI's funding profile is sound, supported largely by diversified customers deposits (about 80% of non-equity funding at end-1H16) with low deposit concentration compared with peers. Retail deposits represent about half of total deposits and provide the group with sizeable stable funding. USD liquidity at group level is adequate although under pressure - particularly in commodity-reliant economies such as Nigeria.

The Stable Outlook reflects our expectations that the group's risk profile will remain stable and that diversification benefits from operating in a range of different economies will help to overcome pressures in Nigeria.

SUPPORT RATING AND SUPPORT RATING FLOOR

ETI's Support Rating (SR) of '5' and Support Rating Floor (SRF) of 'No Floor' reflect Fitch's opinion that sovereign support for the group cannot be relied on. Although Ecobank Nigeria, the group's largest subsidiary, may receive support from the Nigerian authorities, if required, this is unlikely to extend to ETI or other parts of the group.

Similarly, Fitch believes that some of the group's other important subsidiaries could be supported by their respective national authorities, but such support is unlikely to extend to ETI itself. While Nedbank and QNB are long-term and strategic investors in ETI, their current stakes in the group and the limited integration of operations currently mean that institutional support cannot be relied upon. As a result, institutional support is not factored into the ratings.

RATING SENSITIVITIES

IDRS AND VIABILITY RATING

A material worsening in the operating environment could lead to a downgrade of ETI's VR and consequently the IDRs. Furthermore, a weaker funding and liquidity profile, a deterioration in asset quality, which would lead to a worsening of the group's capital position, increasing double leverage or potential restriction in the ability of ETI's subsidiaries to upstream dividends could also trigger a downgrade. Upside to the VR is limited at present given the volatile and challenging environment in which ETI operates.

SUPPORT RATING AND SUPPORT RATING FLOOR

The SR is unlikely to be upgraded or the SRF revised upwards, as we believe it is highly unlikely that the Nigerian authorities would provide support to the group beyond the Nigerian operations.

The rating actions are as follows:

Ecobank Transnational Incorporated:

Long-Term IDR: affirmed at 'B'; Stable Outlook

Short-Term IDR: affirmed at 'B'

Viability Rating: affirmed at 'b'

Support Rating: affirmed at '5'

Support Rating Floor: affirmed at 'No Floor'